HCI Group, Inc. — 2018 First-Quarter Form 10-Q Summary
Business context and reporting period
HCI Group is a Florida-based property and casualty insurance, reinsurance, real estate, and information technology company. Insurance operations generated 94.8% of segment revenue for the three months ended March 31, 2018. The filing covers the unaudited quarter ended March 31, 2018, compared with the quarter ended March 31, 2017.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Gross premiums earned | $85.8 million | $91.6 million | Down 6.4% |
| Net premiums earned | $53.5 million | $63.0 million | Down 15.1% |
| Total revenue | $57.7 million | $67.7 million | Down 14.7% |
| Income before taxes | $14.8 million | $19.1 million | Down 22.7% |
| Net income | $10.8 million | $12.0 million | Down 10.2% |
| Diluted EPS | $1.11 | $1.15 | Down 3.5% |
| Net margin | 18.7% | 17.8% | Improved |
| Combined ratio on net premiums earned | 80.2% | 77.1% | Worsened |
| Combined ratio on gross premiums earned | 50.1% | 53.0% | Improved |
| Net cash from operating activities | $(14.6) million | $24.4 million | Declined |
- Losses and loss adjustment expenses were $19.7 million, down from $25.5 million. The net loss ratio improved to 36.7% from 40.5%, while the expense ratio increased to 43.5% from 36.6% because net premiums earned declined faster than expenses.
- Net investment income increased to $3.2 million from $2.8 million. Net realized investment gains increased to $2.2 million from $0.7 million, but the company recorded $2.6 million of net unrealized investment losses, primarily reflecting equity-market changes.
- The effective tax rate decreased to 27.1% from 37.2%, primarily because of the lower federal corporate tax rate enacted under the Tax Cuts and Jobs Act.
- Cash, cash equivalents, and restricted cash totaled $227.0 million at March 31, 2018, down from $256.7 million at December 31, 2017. Total assets were $773.2 million and stockholders’ equity was $192.9 million.
- Long-term debt was $239.4 million on a carrying-value basis, with principal outstanding of $259.8 million. The debt included $90.0 million of 3.875% convertible notes due March 2019 and $143.8 million of 4.25% convertible notes due March 2037.
- The company paid $3.0 million of common dividends during the quarter and declared a $0.375 per-share dividend payable June 15, 2018. The quarterly dividend paid during the period was $0.35 per share.
Material changes versus the prior comparable period
- Policy attrition reduced policies in force to approximately 136,000 at March 31, 2018, compared with approximately 148,000 a year earlier, contributing to lower gross and net premiums.
- Ceded premiums increased to $32.3 million from $28.6 million. The 2018 amount included a net increase related to retrospective reinsurance provisions, whereas the prior-year period benefited from a net reduction. Management attributed the difference primarily to losses associated with Hurricane Irma.
- Interest expense increased to $4.5 million from $3.5 million, primarily due to the 4.25% convertible debt issued in March 2017.
- Operating cash flow changed from a $24.4 million inflow to a $14.6 million outflow. The 2018 outflow reflected working-capital movements, including payments and changes in loss reserves and reinsurance balances.
- The company repurchased 184,571 shares under its authorized repurchase plan for $6.5 million, leaving approximately $13.5 million available under the plan. Shares outstanding declined from 8.76 million at December 31, 2017 to 8.59 million at March 31, 2018.
- The company adopted new accounting standards for revenue recognition, equity investments, restricted cash, and stock compensation. Equity-security unrealized gains and losses are now recognized in earnings; the filing states that the revenue-recognition impact was not material.
Outlook, risks, contingencies, and unusual items
- No specific financial guidance was provided. Management expects future liquidity needs to be funded primarily through insurance premiums, investment income, and operating cash flows, with potential debt or equity financing for growth or investment opportunities.
- Florida hurricane and tropical-storm activity is seasonal, generally concentrated from June 1 through November 30. Catastrophic events could materially affect quarterly results and operations.
- Loss reserves totaled $148.6 million at March 31, 2018, including $114.2 million of incurred-but-not-reported reserves. Reserve estimates are inherently uncertain and may change materially as claims develop.
- Reinsurance recoverable balances were $85.9 million, with approximately 30.6% concentrated in two reinsurers. The company remains responsible for claims if reinsurers fail to perform.
- Contractual obligations included $25.9 million of minimum premiums under multi-year reinsurance contracts, $17.7 million of unfunded limited-partnership commitments, and $294.6 million of future principal and interest payments on long-term debt.
- Investment portfolios remain exposed to interest-rate, credit, and equity-price risk. A 100-basis-point increase in rates was estimated to reduce the fair value of fixed-maturity securities by approximately $3.4 million.
- Pending legal matters arise in the ordinary course of business; management did not believe they would have a material adverse effect. The filing reports no material changes to previously disclosed risk factors.
- On January 26, 2018, the company acquired the remaining interest in a consolidated real-estate variable-interest entity for $0.5 million, obtaining full ownership without recognizing a gain or loss.
Investor verification points
- Verify policy counts, retention, pricing, and premium trends as policy attrition remains the primary pressure on revenue.
- Review the June 1, 2018 reinsurance renewals, pricing, coverage limits, retrospective provisions, and reinsurer credit quality.
- Monitor Hurricane Irma claims development, incurred-but-not-reported reserves, and future reserve adjustments.
- Assess the company’s ability to fund the March 2019 convertible-note maturity while maintaining dividends, repurchases, and regulatory capital.
- Reconcile operating cash flow with changes in loss reserves, reinsurance recoverables, and unearned premiums.
- Evaluate the effect of equity-market volatility and rising interest rates on investment income, earnings, and accumulated other comprehensive income.